What Happens If a Canadian Charity Fails to Meet Its Disbursement Quota?

If you're running a registered charity in Canada, there's one financial rule you cannot ignore: the disbursement quota. This rule comes from the Canada Revenue Agency (CRA) and requires charities to spend a certain amount of their funds on charitable work every year.

But what happens if a charity doesn’t meet this rule?

In this article, we’ll break everything down in simple terms:

• What is a disbursement quota?
• What does disbursement mean?
• What happens if your charity doesn’t meet the quota?
• How can you stay compliant and avoid penalties?

Let’s dive in.

What Is the Disbursement Quota?

The disbursement quota (DQ) is the minimum amount a charity must spend each year on:

• Its own charitable programs, or
• Gifts to other qualified donees (such as other registered charities).

This rule exists to make sure charities are actively using their money to help the public, not just saving or investing it without action.

CRA’s Current Disbursement Quota Rate

As of 2023, the disbursement quota depends on how much investment property a charity owns:

• 3.5%: If your charity has investment assets under $1 million.
• 5%: If your charity has investment assets over $1 million.

Investment assets include things like stocks, bonds, mutual funds, and other investments not directly used in running charitable programs.

What Is the Meaning of a Disbursement Amount?

A disbursement amount refers to the actual dollars spent from a charity’s funds to meet its disbursement quota. This could include:

• Money spent on running charitable activities (like feeding the homeless, hosting workshops, or delivering aid), or
• Money given to other registered charities to support their charitable work.

For example, if your charity has $2 million in investments, you must spend at least $100,000 (5%) in the year on qualifying charitable work or donations.

What Is a Disbursement Allowance?

A disbursement allowance is not an official CRA term, but some charities may use it informally to refer to:

• The budgeted amount they plan to spend to meet their disbursement quota.
• The estimated allowable range for spending in a given year based on expected revenue or investment returns.

In simple terms, it’s the room or allowance a charity gives itself in its budget to make sure it complies with the quota.

What Is an Example of a Disbursement?

Here’s a clear example:

Let’s say a Canadian charity has $1.5 million in investments. It must disburse 5% of that = $75,000 in the year.

This disbursement could include:

• $40,000 for food programs in low-income areas.
• $25,000 in grants to other registered charities.
• $10,000 for educational workshops.

As long as the total spent on eligible charitable activities is $75,000 or more, the charity meets its disbursement quota.

What Happens If a Charity Doesn’t Meet Its Disbursement Quota?

Failing to meet the quota can lead to serious consequences from the CRA, including audits, fines, and even revocation of charitable status. Here's what could happen:

1. CRA Audit or Compliance Review

The CRA might launch a review of your charity’s finances. They’ll look at:

• How much money your charity raised and spent.
• Whether those funds were used for approved charitable purposes.

If issues are found, you might receive a compliance agreement explaining how to fix the problem.

2. Financial Penalties

If the issue isn’t corrected, the CRA may impose penalties, including:

• A 100% penalty on the shortfall. For example, if you missed the quota by $20,000, you may owe $20,000 in penalties.
• Additional fines if the issue continues.

3. Suspension of Tax Receipting Privileges

One of the biggest benefits of being a registered charity is the ability to issue tax receipts to donors.

If your charity keeps missing its quota, the CRA may suspend this privilege. That can seriously hurt fundraising, since donors often want tax-deductible receipts.

4. Revocation of Charitable Status

This is the worst-case scenario. If your charity consistently fails to meet the disbursement quota and does not fix it, the CRA may revoke its charitable status.

This means:

• Your charity loses tax-exempt status.
• It can no longer issue donation receipts.
• It may be required to give all remaining assets to another registered charity or face a revocation tax of 100% on those assets.

How to Stay Compliant and Meet the Disbursement Quota

The good news? You can avoid all of these problems with some simple steps:

1. Monitor Your Finances Regularly

Keep a close eye on your investment income and expenses. Use accounting tools or hire professionals to track spending throughout the year.

2. Create a Spending Plan

If you’re not on track to meet your quota:

• Increase grants to other charities.
• Launch new charitable programs.
• Expand existing services.

Make sure your spending is eligible and well-documented.

3. File Your T3010 Return Accurately

Every year, charities must file a T3010 Registered Charity Information Return. This includes details about how much money was received, spent, and disbursed.

A mistake on this form can lead to compliance issues, so be accurate and file it on time.

4. Seek Professional Advice

Working with a charity lawyer can help you:

• Understand CRA rules.
• Maximize your disbursement strategies.
• Avoid penalties and surprises.

The disbursement quota helps ensure charities use their funds for good, and not just hold on to money without making an impact.

If you run a charity in Canada, staying compliant with this rule is essential. By tracking your spending, planning ahead, and seeking expert advice, you can protect your charity’s status and continue serving your community.

Need help with your charity?

Contact us today. We help Canadian charities like yours stay compliant.

Call us at 416-488-5888

Visit www.charitylawgroup.ca

Frequently Asked Questions

We often hear questions from charities and the public about Canada’s disbursement quota rules. Below, we’ve answered the most common ones so you can better understand the requirements and consequences of non-compliance.

What is the disbursement quota for Canadian charities?

The disbursement quota is the minimum amount a registered charity must spend each year on charitable activities or gifts to qualified donees. As of 2023, most charities must spend at least 5% of the average value of their investment assets from the previous two years.

What happens if a charity fails?

If a charity fails to meet its disbursement quota, the Canada Revenue Agency (CRA) may require it to make up the shortfall in the following year. Repeated failure can lead to penalties, suspension of receipting privileges, or revocation of charitable status.

What are the rules for charitable status in Canada?

To maintain charitable status, an organisation must operate for exclusively charitable purposes, file an annual T3010 return, meet its disbursement quota, keep proper books and records, and avoid providing undue personal benefits to individuals.

How to complain about a charity in Canada?

You can submit a complaint to the CRA’s Charities Directorate. Provide as much detail as possible, including the charity’s name, registration number, and the nature of the concern. The CRA investigates complaints confidentially.

How do you qualify for a charitable organisation visa in Canada?

While there isn’t a visa specifically for charitable organisations, individuals may qualify for a work permit or volunteer visa if they have an offer from a registered charity or nonprofit in Canada. Immigration, Refugees and Citizenship Canada (IRCC) sets the eligibility requirements.